A Study of Korean Shipbuilders' Strategy for Sustainable Growth
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A Study of Korean Shipbuilders' Strategy for Sustainable Growth MASSACHUSETTS INSTITIJTE OF TECHNOLOGY By JUN Duck Hee Won 0 8 2010 B.S., Seoul National University, 2003 LIBRARIES Submitted to the MIT Sloan School of Management In Partial Fulfillment of the Requirements for the Degree of ARCHIVES Master of Science in Management Studies At the Massachusetts Institute of Technology June 2010 @ 2010, Duck Hee Won. All Rights Reserved The author hereby grants MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part. 1121 Signature of Author Duck Hee Won MIT Sloan School of Management May 7, 2010 Certified by I V I Scott Keating Senior Lecturer, MIT Sloan School of Management Thesis Supervisor Accepted by Michael A. Cusumano Faculty Director, M.S. in.Management Studies Program MIT Sloan School of Management A study of Korean Shipbuilders' Strategy for Sustainable Growth By Duck Hee Won Submitted to the MIT Sloan School of Management On May 7, 2010 In Partial Fulfillment of the Requirements for the Degree of Master of Science in Management Studies Abstract This paper aims to develop potential strategies for Korean shipbuilders for sustainable growth by understanding the characteristics of the shipbuilding industry and the current market situation. Before the financial meltdown in 2008, in the five preceding years, the healthy global economy and the rapid growth of the Chinese economy led to 35% compound annual growth rate (CAGR) in shipbuilding orders. Korean shipbuilders' sales and profits increased dramatically and they invested aggressively to meet the global demand. However, because of the financial crisis, the shipbuilding orders in 2009 decreased by 92% compared to 2007. Accordingly, the decrease in new orders will become a serious risk for Korean shipbuilders to manage because it will cause loss of economies of scale and cash deficit, at the same time. Historically, it is true that the profits of Korean shipbuilders generally mirrored the volume of global seaborne trade, which is ultimately driven by global GDP growth. However, even though the world growth rate, as predicted by OECD, turns positive in 2010, the drastic shrinkage in the shipbuilding demand may not easily recover because of oversupply of fleet volume. In this thesis, I will address current status of the shipbuilding market, project a market forecast, and analyze financial information of four major Korean shipbuilders. Considering the current market situation and financial status of Korean shipbuilders, I will suggest for Korean shipbuilders some potential business strategies as follows: focusing on offshore units, exploiting new market demand, and considering business diversification. Thesis Supervisor: Scott Keating Senior Lecturer, MIT Sloan School of Management Table of Contents Abstract Table of Contents List of Tables List of Figures 1. Introduction 1.1 Background 1.2 Objectives of Thesis 1.3 Methodologies 1.4 Structure of the Thesis 2. Overview of the Shipbuilding Industry 2.1 History of Modern Shipbuilding Industry 2.2 Main Products 2.3 Shipbuilding Process 2.4 Major Shipbuilders 2.5 Key Features of the Shipbuilding Industry 2.5.1 Cyclic Industry 2.5.2 Massive Investment 2.5.3 Highly Competitive Market 2.5.4 Long Term Project 2.5.5 High Volatility of Price 2.6 Summary 3. Major Factors for Performance 3.1 External Factors 3.1.1 Exchange Rate 3.1.2 Global Growth Rate & Seaborne Trade 3.1.3 Steel Price 3.1.4 Oil Price 3.1.5 Domestic Shipping Industry 3.2 Internal Factors 3.2.1 Workforce 3.2.2 Technology 3.2.3 Economies of Scale 3.2.4 Product Mix 3.3 Summary 4. Market Analysis 4.1 Current Market Situation 4.1.1 Demand Perspective 4.1.2 Supply Perspective 4.1.3 Price 4.1.4 Others Considerations 4.2 Market Forecast 4.3 Summary 5. Current Status of Korean Shipbuilding Industry 5.1 Market Share 5.2 Order Book 5.3 Workforce 5.4 Competitive Advantages 5.5 Offshore Plant Business 5.6 Summary 6. Financial Analysis of Korean Big Players 6.1 Sales Revenue 6.2 Operating Profit & Margin 6.3 Interest Income 6.4 Advance Receipts 6.5 Property, Plant & Equipment 6.6 Operating Cash Flow 6.7 Return on Equity 6.8 Summary 7. Potential Strategy for Korean Shipbuilders 7.1 SWOT Analysis 7.2 Implications from Market Characteristics 7.3 Implications from Five Forces Model 7.3.1 Threat of Entry 7.3.2 Rivalry among Existing Firms 7.3.3 Bargaining Power of Buyers & Suppliers 7.3.4 Shipbuilding Value Chain 7.4 Implications from Financial Analysis 7.5 Suggestions 7.5.1 Focus on Offshore Units 7.5.2 Exploit New Market Demand 7.5.3 Consider Business Diversification 7.6 Conclusion List of Tables Table 2.1 Leadership changes in the shipbuilding industry 13 Table 2.2 Shipbuilding market share in the 1900s 14 Table 2.3 Main product types 17 Table 2.4 Size categories of oil tankers and bulk carriers 18 Table 2.5 Buyers' main purchase criteria 18 Table 2.6 Shipbuilding process and building period 20 Table 2.7 Order book by countries and shipbuilders as of 2009 21 Table 2.8 Investment in Korean shipbuilding industry 25 Table 3.1 Hedging policies of major shipbuilders 30 Table 3.2 Domestic portion in the order book 34 Table 3.3 Comparative added value per each ship type 36 Table 4.1 Trend of total demolitions 43 Table 4.2 World new orders and capacity forecast 45 Table 4.3 Cancellations of containers 48 Table 4.4 Age profiles of main ship types 49 Table 4.5 Market Forecast (A) 50 Table 5.1 Portion of Korean shipbuilding in terms of exports 53 Table 5.2 Order book mix of China and Korea in 2009 55 Table 5.3 Current order book and capacity 55 Table 5.4 Comparison of labor costs between Korea and China 59 Table 5.5 Comparison of competitiveness among Korea, Japan, and China 60 Table 6.1 Sales Revenue 65 Table 6.2 Operating profit & margin 67 Table 6.3 Interest income 69 Table 6.4 Net advance receipts 71 Table 6.5 Debt to equity ratio 72 Table 6.6 PP&E turnover 73 Table 6.7 Depreciation expenses forecast 74 Table 6.8 Main cash flow streams 75 Table 6.9 Decomposition of ROE 77 Table 7.1 Diversification out of shipbuilding by Japanese shipbuilders 91 List of Figures Figure 2.1 World completions by ship types Figure 2.2 Order book mix by region Figure 2.3 Cycle of shipbuilding industry in terms of annual completion Figure 3.1 Exchange rates to the U.S. dollar Figure 3.2 Correlation among GDP, seaborne trade, and shipbuilding price index Figure 3.3 Japan steel plate price Figure 3.4 Crude oil price Figure 3.5 World fleet by nationality of owners Figure 4.1 Dynamics of shipbuilding industry Figure 4.2 Trend of total world fleet and order book Figure 4.3 Correlation between ship finance and new orders Figure 4.4 Correlation between USD/EURO rate & shipbuilding price index Figure 4.5 Forecast of deep-water exploration Figure 4.6 Trend of GDP growth and new orders in 1970s Figure 4.7 New building prices of each ship types Figure 4.8 Containers not in service Figure 5.1 Relative market shares as of 2009 Figure 5.2 Employees in nine major Korean shipbuilders Figure 5.3 Composition of employees Figure 5.4 Average salary & sales per employee Figure 5.5 Relevant industries with offshore plant Figure 5.6 Order book mix in dollars Figure 6.1 Sales mix of HHI Figure 6.2 Operating margins of HHI divisions Figure 6.3 Effect of interest income Figure 6.4 Time chart of a project's net advance receipts Figure 6.5 Net PP&E Figure 6.6 Return on Equity Figure 6.7 ROE of major Asian shipbuilders in 2008 Figure 7.1 SWOT analysis of Korean shipbuilding industry Figure 7.3 Shipbuilding Value Chain Figure 7.4 Negative reinforcing loops because of decrease in new orders Chapter 1 Introduction 1.1 Background Shipbuilding has been an attractive and an important industry for countries such as Japan, Korea, and China aiding them during their development and nation building stages. These countries regarded the shipbuilding industry as a backbone industry that could generate huge positive effects on downstream and upstream industries such as shipping, steel, non-metal, electric, and machinery industries. The shipbuilding industry itself is both a capital-intensive industry that needs massive capital expenditure and a labor-intensive industry that has a huge effect on employment. Additionally, it is a major foreign currency earner that can contribute to current account balance by exporting ships. Japan, for instance, promoted the shipbuilding industry to recover its industrial infrastructure destroyed during WWII. The Korean government supported the shipbuilding industry for its economic development plan in 1970s to succeed. Recently, the Chinese government announced that China would try to achieve the leadership position in the shipbuilding industry by 2015. From the time Hyundai Heavy Industries (HHI) successfully delivered its first order, 260,000 DWT VLCCI in 1974, Korea finally became a world shipbuilding leader surpassing Japan in terms of annual new orders and orders booked in 2000. Before the financial meltdown in 2008, in the five preceding years, the healthy global economy and the rapid growth of the Chinese economy led to 35% CAGR in shipbuilding orders in terms of CGT 2. The sales and profits of Korean shipbuilders increased dramatically and they invested aggressively to meet the global demand.